addressing state and local government financial dependency on the federal government

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Addressing State and Local Government Financial Dependency on the Federal

GovernmentPresented to the

West Virginia Joint Spring Meeting Mid-Ohio Valley Chapter

Association of Government Accountants

By

Edward J. Mazur—Senior Advisor, Public Sector ServicesMay 14, 2013

©2012 CliftonLarsonAllen LLP2

Objective—Strengthen Capabilities to:

• Assess the implications of intergovernmental financial dependency and related risks (IFD) on local governments and the State of West Virginia

• Consider the impact of IFD during strategic and budgetary planning

• Consider available options for communicating IFD information to a government’s stakeholders

• Identify ways in which senior state and local elected officials can share leadership in returning the federal government to fiscal sustainability


What is Intergovernmental Financial Dependency?

• The transfer of significant amounts of financial resources among the three levels of government in the U.S., and

• The direct operating activities of one level of government occurring within the communities of another level of government

Paraphrased from the “Intergovernmental Financial Dependency Risk Prospectus,” presented to the Government Accounting Standards Board by GASB staff, dated March 19, 2007.


Comments on Federal Fiscal Sustainability


Analysis of Federal Liabilities, Intragovernmental Debt, and Social Insurance Obligations

$ Billions 2012 2011

Federal Liabilities:Publicly-held Debt $11,332* $10,174 **Federal Employee & VA Benefits 6,274 5,792Other 1,243 1,526

Intragovernmental Debt—Owed to Social Security, 4,853 4,711

Medicare and other Trust Funds

Federal Social Insurance ObligationsSocial Security 11,278 9,157Medicare—Parts A, B & D 27,174 24,572Other 102 101 Total Liabilities, Intragovernmental Debt & SI Obligations $62,256 $56,033 Current-dollar GDP, Weighted Avg. FY (Source: OMB MSR) $15,550 $15,176

Liabilities and Obligations as % GDP 400% 369% *73% of 2012 GDP **67% of 2011 GDP

Source of Financial Statement Data: 2012 Financial Report of U.S. Government


Key Measures of State Government Intergovernmental Financial

Dependency


Key Dependency MeasuresWest Virginia, Maryland, Virginia, and Total U.S. ($ in Billions)

Key Dependency Measurement

WV 2011

MD2011

VA2011

Total U.S. 2011

Direct Federal Revenues to State $6.3 $13.8 $14.4 $806.7

Percentage of Total State Revenues – All Sources

39.4% 35.4% 28.6% 39.0%*

Direct Federal Grants to Local Governments (2010) $0.2 $1.4 $1.6 $64.5

Federal Purchases from State Businesses $1.2 $26.2 $60.0 $454.9

Federal Payments to Individuals (2010) – Wages, Pensions, Social Security, Medicare $14.5 $51.7 $62.6 $1,937.3

Total Direct and Indirect Federal Flows $22.2 $93.0 $138.6 $3,263.4

* Average


Key Dependency MeasuresWest Virginia, Maryland, Virginia, and Total U.S. ($ in Billions)

Key Dependency MeasurementWV

2011MD 2011

VA2011

Total U.S. 2011

Total Direct and Indirect Federal Flows $22.2 $93.0 $138.6 $3,263.4Real GDP by State Inflation Adjusted to 2005~ $55.8 $264.4 $375.7 $13,016.8

Total Federal FlowsGross State Product 39.8% 35.2% 36.9% $27.1%*

Military Facilities- Count 39 122 236 4,429Military Facilities- Present Replacement Value $1.3 $28.2 $48.0 $674.0Military Facilities – Military and Civilian Personnel (thousands) 5.9 103.0 478.5 3,170

Federal Leased/Owned Buildings (millions sq/ft) (2012) 3.6 29.6 27.1 302.8

* Average of individual state percentages~ Source: BEA, obtained 12/6/2012


Key Dependency MeasuresStates by Percentage of Revenue

Average 50 States = 39.0%

State (Top 5)

Direct Federal Revenues to State

(billions)Percentage of Total State Revenues – All Sources

1- Rhode Island $5.3 62.3%2- Tennessee $20.7 57.1%3- South Dakota $2.7 56.2%4- Louisiana $17.6 50.9%5- Arizona $16.2 50.1%State (Median)25- Washington $17.3 37.9%26- Kansas $6.6 37.6%

State (Lowest)50- Wyoming $1.1 13.9%


Key Dependency MeasuresStates by Percentage of State GDP

50 State Average = 27.1%

State (Top 5)

Total Direct and Indirect Federal Flows ($ Billions)

Real GDP by State ($ Billions)

Direct and Indirect Federal Flows as

Percentage of GDP1- Kentucky $57.6 $141.3 40.8%2- West Virginia $22.2 $55.8 39.8%3- Alabama $58.4 $150.3 38.8%4- Virginia $138.6 $375.7 36.9%5- Maryland $93 $264.4 35.2%State (Median)25- Kansas $29.7 $113.4 26.2%26- Georgia $95.4 $365.8 26.1%

State (Lowest)50- Delaware $8.5 $57.3 14.8%


The Risks of Intergovernmental Financial Dependency for States and Local Governments• Significant downward fluctuations in:

o direct intergovernmental revenue flows ando indirect flows which impact economic activity and tax

revenues! • Potential fluctuations to income and asset values

associated with U.S. Treasury Securities, due to changes in:o Federal Reserve policy ando levels of holdings by foreign governments!

• Disruption to the economy of West Virginia


Additional Evidence of Current IFD Risk

• The July 2012 Report of the State Budget Crisis Task Force identified six major fiscal threats to U.S. states:– health care spending,– federal deficit reduction, – underfunded retirement funds, – eroding tax bases, – local economic stress, and – state laws.

• GAO State & Local Governments' Fiscal Outlook April 2012 “…like the federal government, the state and local government sector

faces persistent and long-term fiscal pressures.


Additional Evidence of Current IFD Risk (cont’d)

• In 2012,Moody’s instituted five metrics to assess the impact of Federal activity within a state or local government jurisdiction:– Economic Sensitivity: Federal employment to total

unemployment– Economic Sensitivity: Federal procurement to GDP– Economic Sensitivity: Healthcare employment to total

employment– Exposure to Federal Transfers: Medicaid expenditures to

total state expenditures– Capital Markets Exposure: Short-term and puttable debt to

available resources

*States Prepare for Federal Cuts, AGA PDC, July 2012, Emily Raimes, V.P-Senior Credit Officer


A Government’s Choice in Facing Federal Cuts and Program Changes

* * * * * Become Informed and Proactive

OR Be Reactive?


Options for Being Proactive

1. For currently known reductions in Federal activity:a. Identify each distinct revenue flow that will be

impacted. For example:i. Specific grants and contributionsii. Corporate tax revenues from Federal suppliersiii. Income tax revenues from employees of the

Federal government or its suppliersb. Estimate current and future year revenue impactsc. Identify opportunities to reassign staff and

government generated revenuesd. Update strategic plans to modify service capacity

and expected performance


Options for Being Proactive (cont’d)

2. Track future Congressional actions and changes in administrative regulations to assess likely impact on government revenues and operations, through “Federal Funds Information for States” at: http://www.ffis.org/

3. Exchange information with other elected and appointed officials at the state and local level

4. Support actions by the Governor and other elected officials in seeking opportunities to testify before Congressional committees on restoring fiscal balance to the Federal government

http://www.ffis.org/


Communicating Actions to Manage IFD Risks

A Key Assertion:Difficult change, when managed well, is a positive! It signifies:

a. Effective leadership by elected and appointed officials

b. Respect for stakeholders, whether they be individual citizens or interest groups

c. Appreciation that individuals and groups within a complex society need advanced warning to adequately prepare for change


Bond Rating Firms Expect Solid Management of Risks—and Welcome Timely Communications

Moody’s has cited approaches to mitigate Federal risks:*With potential US cuts to states, options available to

states include:◊ Creating special reserve funds to deal with cuts◊ Raising additional revenues ◊ Cutting expenditures◊ Deferring expenditures◊ Reducing aid to local governments◊ Tapping rainy day funds and other sources of liquidity

*States Prepare for Federal Cuts, AGA PDC, July 2012, Emily Raimes, V.P-Senior Credit Officer


Options for Financial Reporting of IFD Risk

Disclose within the Notes to the Basic Financial Statements:*– A schedule disaggregating sources of grants and contributions

shown in the Statement of Activities– A concentration of revenues note, identifying

intergovernmental financial flows, the vulnerability of these flows, and potential changes in levels of service

– A concentration of investment credit risk note, identifying total U.S. Treasury Securities held and indicating the credit rating of all such securities

– A contingency note, identifying probable future losses of revenue from enacted legislation and/or the financial condition of the funding entity

*As allowed by FASB Cod. Sec. 275, and by GASB Statements No. 40 and 62


Options for Financial Reporting of IFD Risk (cont’d)

Enhance MD&A**by:– Establishing a separate section communicating fiscal

sustainability– Presenting a two-year schedule of “indicators” of an entity’s

“willingness” to meet financial obligations when they come due– Quantifying intergovernmental revenues and other major

revenues as a percentage of total revenues– Discussing the degree expenditures are funded from revenues

beyond the entity’s control– Explaining of commitments for debt obligations authorized but

not yet issued

**As allowed under GASB Statements No. 34, Par. 11 and 37, Par. 4


Options for Financial Reporting of IFD Risk (cont’d) • Report within the CAFR’s Economic Condition Reporting- The

Statistical Section***Summarized data concerning intergovernmental grants by major funding source and program, so to better provide the user with historical information concerning the sources and programmatic affiliations of material grant funding.

• Publish a “Special Report on Intergovernmental Financial Dependency” separate from the CAFR****

***As allowed by GASB Statement No. 44****As allowed by GASB Concept Statement No. 3


Admonitions to Address the Fiscal Sustainability of Our Governments

“Only an informed public can demand that the political systems, federal, state and local, recognize these problems and take effective action,”– State Budget Crisis Task Force Chairmen Richard Ravitch

and Paul Volcker

“There is no easy way out of our debt problem, so everything must be on the table. A sensible, realistic plan requires shared sacrifice…”

National Commission on Fiscal Responsibility and Reform, December 2010


CLA Published Guidance on IFD

CLA Published Reports

Intergovernmental Financial Dependency 2013: An Annual Study of Key Dependency Measures for the 50 States, March 2013

http://www.cliftonlarsonallen.com/IFD2013/

Intergovernmental Financial Dependency: A Guide for State and Local Governments in Preparing a Special Report, August 2011

www.cliftonlarsonallen.com/IFDspecialreportguide

Related Articles Authored by Edward Mazur, CLA Senior Advisor for Public Services

“Intergovernmental Financial Dependency: Why It Matters!”, AICPA Journal of Accountancy, October 2011

www.journalofaccountancy.com/issues/2011/Oct/20114206

“Our Nation’s Governors—Walking a Tightrope Without a Net,” AGA Journal of Government Financial Management, Summer 2011

www.cliftonlarsonallen.com/walkingatightrope

http://www.cliftonlarsonallen.com/IFD2013/

http://www.cliftonlarsonallen.com/IFDspecialreportguide

http://www.journalofaccountancy.com/issues/2011/Oct/20114206

http://www.cliftonlarsonallen.com/walkingatightrope


Contact Information

Edward J. Mazur, CPASenior Advisor--Public Sector Services

CliftonLarsonAllen LLP Arlington, VA 22203Office: 517-227-9538Mobile: [email protected]

Taylor PowellSenior AssociateFederal Government AssuranceCliftonLarsonAllen LLP Arlington, VA 22203Direct: 571-227-9631Mobile: [email protected]

mailto:[email protected]

mailto:[email protected]

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